Ferrier Hodgson’s James Stewart: Retail fall ‘worst in 20 years’

ELI GREENBLAT
JANUARY 17, 2019
SENIOR BUSINESS REPORTER
One of the nation’s leading corporate restructuring experts, Ferrier Hodgson partner James Stewart, is warning that the collapse in shopping centre traffic in the two weeks before Christmas is the worst he has seen in more than 20 years, raising the prospect of more retail failures this year.
At a time when most retailers should be swollen with cash from a buoyant trifecta of Christmas, Boxing Day and New Year’s sales, the latest data has revealed a slump in visitations.
Shoppertrak, an analytical tool widely used in the retail sector, particularly by shopping centre landlords, showed foot traffic in the last two weeks of 2018 was down 15 per cent and 23 per cent respectively.
“I have been working in the retail space for 20 years now, and I can’t ever remember those sorts of numbers for Christmas,’’ Mr Stewart told The Australian.
“I had heard on my grapevine that traffic numbers were well down before those numbers came out and I had heard that general merchandise, apparel and footwear retailers were really struggling.
“And when those numbers came out, I’ve gone, ‘Wow, they are scary numbers’, and so they have validated what I had already heard in the market. That means the biggest two weeks of Australia’s retail calendar just had a huge air swing at Christmas and Boxing Day trading.”
It could also be ill news for landlords as they are forced to step in with rental support for underperforming tenants or risk store closures.
“The problem for landlords is retailers are the lifeblood of their centres and if retailers struggle, they either support them with rent abatements or they face the prospect of empty stores,” Mr Stewart said.
“Let’s be clear: for the first time in 20 years, many landlords are seriously nervous about what is going on.”
Mr Stewart has his fingers on the pulse of Australia’s $310 billion retail sector. With more than 30 years in the industry, he has led the restructures and receivership of some of the biggest failures such as Dick Smith, Harris Scarfe, Borders and Colorado Group.
“To put things in perspective, many retailers are battling to hold on to like-for-like sales with zero growth, and if they can achieve this it’s a great outcome,” Mr Stewart said. “To come out the other side of the biggest sales (and profit) period of the year with this sort of decline in foot traffic must hurt, a lot.”
He has sounded the alarm that with a poor Christmas many retailers could face a liquidity crisis.
“The challenge is where retailers’ balance sheets are not as strong as they could be, and how do they ride that through?” he said. “What it means is they just haven’t hit their profit targets for the December quarter. Profit numbers for December normally hold up your whole year.
“Then you end having to clear more stock than you otherwise had budgeted to clear, which means from a liquidity point of view you are more challenged.
“It creates a lot more pressure for retailers and there would be quite a few who were probably not expecting too much from Christmas but probably weren’t expecting this.’’
Those cracks are already starting to open.
This week also saw the collapse of menswear fashion chain Ed Harry, with voluntary administrator KPMG’s Brendan Richards pointing to a drop-off in traffic at the centres and malls that the business had a presence in.
“It has also become clear that shopping centre footfall has been significantly weaker than expected,’’ Mr Richards said.
Mr Richards told The Australian yesterday that the centres that Ed Harry stores were situated in, mostly suburban and ­subregional malls, were encountering foot traffic declines of as much as 10 per cent.
“The feedback I have had is that landlords are facing issues across the board … and certainly in the case of this business (Ed Harry) it was around about 10 per cent for the Christmas period,” Mr Richards said
“That’s foot traffic into the shopping centres and then you have to get the people from the centre into the Ed Harry store.
“The feedback from other retailers … and from landlords (is) that that’s a pretty consistent experience.’’
Only three weeks after Christmas, leading general merchandise chain Kmart lowered its December-half sales and earnings targets due to poor trading conditions, with Kathmandu and women’s fashion chain PAS also issuing profit warnings after downbeat holiday sales.
Consumers look to be in a rut, and yesterday’s Westpac consumer confidence index for January turned negative.
The Westpac-Melbourne Institute Index of Consumer Sentiment fell 4.7 per cent to 99.6 in January, from 104.4 in December, in what was the biggest monthly fall in more than three years
Mr Stewart said the slide in centre visits last month was partly a reaction to the shift to online shopping, as well as the emergence of sales in November that had shifted buying activity forward a month. “Online continues to grow at exponential levels, locally and globally, taking sales from physical retail outlets,” Mr Stewart said.
“The evolution of November as the new December has increased the operational complexity of running a retail business, and at the same time pulled forward Christmas sales and eroded margins as most November sales are at a discount.”
In a note to clients, Macquarie Wealth Management said a survey of unlisted retailers found that almost half (49 per cent) of respondents indicated that trading was negative for retail sales.
“At a category level, apparel was particularly weak (around 60 per cent negative), food & liquor mixed (around 66 per cent positive vs 34 per cent negative), and electronics a bright spot reporting stable conditions albeit (from a) limited sample,” the note said.
“We suspect heavy online trade in November from Black Friday & Cyber Monday saw a pull-forward in sales, creating a hole in the higher margin pre-Christmas trade. It is clearly a challenging backdrop for traditional retailers dealing with a combination of structural and cyclical issues at present, particularly in the apparel sector.”